Q4 2020 Conagra Brands Inc Earnings Call
Good day, and welcome to a quarter ago Brands' fourth quarter fiscal year 2020 earnings conference call.
All participants will be offset openly about.
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After today's presentation there'll be an opportunity to ask question.
Please note the to that is being recorded.
I would now like to turn the conference over to Brian Carney. Please go ahead.
Good morning, everyone. Thanks for joining up I'll remind you that we will be making forward looking statements today, well, we're making a statement.
We did not hoping to get our key about them.
Cheap.
[laughter] factors included in the documents we filed a C.
Oh, so well when discussing non-GAAP financial partners.
This is to adjusted items, including organic net sales.
Well I guess, that's my belief.
Variability carrier.
We see the earnings release for additional information on our ability.
The GAAP to non-GAAP reconciliations can be found I either in the earnings press release, where the earnings why.
Most of which can be found any investor relations section orbit like American brands Dot com.
Finally, we will make up.
The total conagra brands as well of legacy [laughter].
Well this is Ted what did become bigger brands.
My first Bexley income or [laughter] associated with the acquired Pinnacle foods.
[laughter] turnovers.
Thanks, Brian.
Good morning, everyone and thank you for joining our fourth quarter fiscal 2020 earnings call.
On behalf of Conagra brands I want to start by expressing my heartfelt hope that you in your families are continuing to stay safe and healthy.
On today's call, we're going to address our fourth quarter fiscal 2020 results our expectations for fiscal 2021.
And our perspective on why Conagra is uniquely positioned to succeed in this new environment.
But first I want to provide some context around what has brought us to this point.
Over the past five years, we have been purposefully architecting one of the largest transformation in the food industry.
When we embarked on this process, we made major strategic decisions on where to compete and how to win.
After decades as a food conglomerate, we transformed into a pure play branded food company with a portfolio focused on competing in three domain.
Rosen snacks and staples.
We committed to perpetually reshaping our portfolio for better growth and better margin.
Established a disciplined approach rooted in a playbook that we call the conagra away.
This relentlessly principle based playbook is filled with repeatable and scalable processes.
Focus on modernizing our iconic brands through superior food contemporary packaging and strong consistent marketing investment.
The Conagra away, it's not just a way to build brands, but an operating model that has helped cultivate our agile motivated and highly energized culture.
As I will describe in more detail in a moment fiscal 2020. So unprecedented performance is we built upon the extraordinary progress we've made over the past five years.
We further strengthened our business.
Including getting legacy pinnacle back on track.
And delivered strong financial results.
During the fourth quarter in particular, our transformation was put to the test you were seeing the fruits of our labor are modernized portfolio and agile culture enabled us to respond.
Increased consumer demand driven by Cobot 19.
At this point.
The degree to which demand will return to historical norms is still uncertain.
And the timing of the changes in consumer demand is also uncertain. However, we believe that demand will likely remain elevated near term given both consumer perceptions about returning to work and eating outside the home as well is the fact that consumers are discovering and rediscovering the pleasures can be it is.
And tremendous value proposition of dining at home.
They will cover the financials in more detail, but I want to let you know that we continued to be on track to deliver our fiscal 2022 algorithm and we remain committed to achieving our leverage target of 3.5 times to 3.6 times by the end of fiscal 2021.
It will detail today, we believe our portfolio is optimally positioned to succeed in the new normal.
We are focused on making the right investments to ensure that we can continue to safely and reliably meet consumers' needs in fiscal 21 and the longer term.
Today's presentation, we will cover our business update the behavioral shifts we've seen.
And how conagra is well positioned to benefit from these shifts and what we expect going forward in terms of our near term outlook and the opportunity to create long term value.
Beginning with our business update.
Before I get into the numbers I would like to recognize that are extraordinary results have only been possible because of the thousands of hard working conagra team members on the front lines across North America.
Your at Conagra, we talk about infusing a refused to lose attitude and never before have we seen our team makes such extraordinary efforts.
The team's commitment has enabled us to meet the elevated demand from our customers and the communities, we serve and deliver the strong results that we're announcing today.
Couldn't be more proud of all that they have accomplished to all of our team members. Thank you great job all around.
During the fourth quarter, we experienced significant growth across our core operating metrics, including 21.5% growth in organic net sales and a 108.3%.
Adjusted EPS.
These results helped contribute to our rapid progress in reducing our leverage and I'm proud to say that we ended the quarter with a net leverage ratio of 4.0 times down from 4.8 times in the quarter.
As you can see on slide nine our growth was not confined to one area, but was driven by strong retail sales across our portfolio spanning staples frozen and snacks.
Our strong growth in E com continue to accelerate both on an absolute basis and as a percentage of our overall sales.
Work, we've done over the past several years to improve our ecommerce capabilities has certainly paid off.
As consumers increasingly adopt online free shopping.
Our share of E Commerce sales has steadily increased.
Slide 11 highlights that our disciplined approach to innovation is clearly working.
Our absolute sales on new innovation introduced this year increased 43% compared to our innovation slate of fiscal 2019.
As a reminder, we stated at our initial Investor day that our goal was to have 15% of total sales coming from products launched within the past three years.
Well today I'm proud to say that we're consistently performed above that level in a few minutes will provide you some of the new innovation that we haven't store for fiscal 2021, as we seek to build upon this success.
As we've discussed previously frozen is an increasingly important domain for consumers, especially in today's environment.
The fourth quarter total conagra frozen retail sales grew 26.2% over last year.
Strong growth across each frozen category, including single serve meals vegetables, multi serve meals and plant based meat alternatives.
And this slide 13 shows as we grew we also gained share in the important frozen meals category during the quarter continuing a trend we've seen for sometime now.
The Conagra way playbook continues to pay off.
Well the trends have remained strong.
There's even more opportunity, particularly in frozen vegetables.
Words, I faced some unique dynamics in the quarter.
As I said earlier the category remained extremely relevant for consumers, we continue to see robust demand for frozen vegetables in our retail sales up 26.5% during the quarter.
Importantly, birds eye hold the top position in category share and has two times the share of the next branded player.
Given the incredible surge in demand we experienced during the fourth quarter and our number one brand position, we hit a ceiling on capacity.
Furthermore, we made the decision to temporarily close a plant during the quarter due to cobot 19, which further constrained capacity.
The good news is the plant to safely back up and running flat out.
In addition.
We have made the strategic decision to bring on more external partners to fulfill demand and rebuild inventory.
These investments in our supply chain will allow us to efficiently meet the elevated demand, we're seeing today and expect to see going forward.
This is an important example that investment and I will expand on this in a few minutes.
Turning to snacks.
Recall that our snacks business over indexes to convenient stores, which saw softer traffic due to cobot 19 during our Q4.
So the speeds category was impacted by the postponement and then merit many areas of the country cancellation, a baseball and softball seasons.
Baseball in seed go hand in hand, and the loss of these opportunities had a negative impact on the category.
Even despite these discrete headwind the snacks business delivered a terrific, 20.1% year over year growth and a 26.4% growth on a two year basis.
And on Slide 16, you can see our performance in stable a category that is more relevant than ever before.
Our total staples business grew an incredible 46.3% for the quarter.
Six brands to the right.
Our largest staples brands accounting for over 50% of our staple sales at retail pre cobot.
And each experienced considerable growth in the quarter.
These businesses are proving to be a distinct benefit to our portfolio.
But what we're pleased with our results for the quarter and the year.
We are particularly excited about what the quarter has taught us about the opportunity that lies ahead as consumers have shifted their behaviors and eating habits.
Slide 18 shows some of the key ways in which we're seeing consumers behavior shift in response to covert 19.
Many consumers are rediscovering enjoyment associated with at home eating whether it's making fun baked goods cooking with the family we're enjoying a movie night with some snacks.
Numerous consumers are also discovering new things about food. During this time many are learning how to truly cook for the first time for discovering Bacon recreate restaurant favorites at home.
We believe that many of these activities have staying power and are likely to persist even after a post kobin world in whatever new normal we settle into.
We also believe our broad and refreshed portfolio of innovative products is best suited to meet consumers' needs as they engage in these food behaviors.
Slide 19 shows the strong growth during the quarter across our iconic brands demonstrating how well suited our portfolio is to meet these behaviors.
Our ability to meet the changing consumer needs is balanced across our three domains slide 20 shows how household penetration grew during the quarter in staples snacks and frozen.
And as we've been able to modernize and innovate our iconic brands, we are attracting younger consumers.
Slide 21 shows that new consumers to our brands over index in the younger millennial and Gen X market segments.
Driving new trial is always a key focus for us.
That's meant that we've made over the past five years and updating our food with bolt on trend flavors and modern food attributes were premised on the belief that if we can get people to try our food they will come back for more and that is exactly what's happening.
Slide 22 shows that continuously improving repeat rates from consumers, who tried our foods for the first time in March when the pandemic really started to accelerate in the U.S.
The improved repeat rates are broad based across many of our iconic brands importantly, when we attract new triers to our brands. They are coming back to purchase again more often than they did a year ago <unk>.
It's worth noting that this trend holds true for the big three pinnacle brands validating our work over the last 12 months.
As slide 24 shows we're not just seeing an increase in repeat buyers.
But we're seeing an increase in the frequency at which they return.
Customers are not just coming back for more they're coming back time and time again.
And it can to the strength of our trial and repeat results on an absolute basis.
We are outperforming our peers in terms of new trial.
Let's take frozen as an example.
Slide 25 demonstrates how our banquet healthy choice and Murray calendars brands are leading frozen single serve peers in new buyer acquisition.
And as slide 26 shows these new frozen buyers are different disproportionately coming from the millennial in Gen X market segments similar to what we see in total conagra trends.
Unlike the total conagra trends we discussed.
Not only are we attracting new buyers, but we're seeing higher repeat rate in our frozen segment than our peers.
Similarly, despite the supply constraints, we faced that I noted earlier birds eye continued to lead category in terms of both new consumers and repeat purchases compared to peers during the quarter.
All of these trends have important implications for our value creation opportunities. We look ahead.
We believe the dynamic environment in which we find ourselves provides a unique window of opportunity to maintain the current momentum such that we maximize our long term value creation potential.
That possible, we need to make investments focused on doing everything in our power to ensure the physical availability of our products.
Instead of choosing to simply except the elevated demand as transitory and focus on maximizing near term margins. We have chosen to bolster the long term earnings potential of our company.
We plan to accomplish this through investing in the key areas you see on this slide which include increasing capacity, both internal and external innovation inventory E Commerce and safe.
By investing behind todays elevated trial rates, we will build relationships with new consumers and maximize consumer conversion.
The lifetime value of these consumers easily justifies these actions.
Slide 31 shows some highlights of our fiscal 21 innovation slate.
Some of these items began launching in Q4, and we will continue to roll out these new products throughout the year.
Overall, we are confident that the investments, we're making will produce strong ROI.
They will also maximize our long term value creation and ultimately shareholder value.
Turning to our guidance on slide 32.
We know that you would like as much information about our expectations for the year as possible.
Given the very dynamic nature of the external environment forecasting the full year right now is more difficult than normal.
As of today, therefore, we're providing Q1 guidance.
We hope that when we report Q1 results, we will be in a position to give you a further update on our outlook. While we don't expect the next few months to drive as much change as the past few we expect to know a lot more by then.
He is going to go into more depth regarding the guidance. So I'll just hit the highlights here.
During the first quarter fiscal 2021, we expect to deliver organic net sales growth of 10% to 13%.
Adjusted operating margin of 17% to 17.5%.
Adjusted EPS of 54 cents to 59 cents.
As I said earlier, we remain on track to reach our fiscal 2022 targets outlined on this slide as well as our deleveraging ratio.
With that I'll turn it over to Dave.
Thanks, Sean and good morning, everyone.
Before I discuss the details of the quarter I want to take them up to wish you all well.
I Hope you and your families are continuing to stay healthy insane.
I'll kick off this portion of the call by pointing out a few highlights for the quarter and the full fiscal year, which are captured on slide 34.
Overall, we're very pleased with our performance for Q4 and fiscal year.
Sean discussed earlier in the fourth quarter. The cobot 19 pandemic led to unprecedented demand in our retail businesses, which more than offset softer foodservice demand.
This increased retail demand combined with our strong execution enabled us to exceed the most recent full year fiscal 20 guidance for total company sales profit and free cash flow metrics.
The key takeaways for Q4 fiscal 20 are.
Organic net sales increased 21.5% in the fourth quarter and 5.6% for the full year.
Adjusted operating margin increased almost 400 basis points for the fourth quarter and over 100 basis points for the full year.
Adjusted EPS more than doubled in the fourth quarter and grew 13% for the full year.
And adjusted EBITDA increased 21.6% for the full year to just under 2.3 billion.
Helping to reduce the leverage ratio to 4.0 times at the end of fiscal 2000.
Let's start with the net sales bridge on slide 35.
As you can see our 21.5% organic net sales growth in the fourth quarter was driven by 21% volume growth.
With price mix contributing half a percentage point.
Divestitures, we're at 310 basis point headwind in the quarter.
This headwind will diminish sequentially as we continue to anniversary the divestiture closing dates going forward.
Foreign exchange was a 70 basis point headwind in the quarter with the weakening of the Mexican peso, representing about two thirds of the headwind.
This was a bit higher than we were expecting for Q4.
Finally, the 50 Threerd week at an 810 basis points to the quarter, which was more of a net sales tailwind than we expected due to the elevated kobin related demand at the end of the quarter.
Taking total reported net sales growth to plus 25.8% for Q4 versus a year ago.
Turning to slide 36, you see our sales summary by segment.
In the fourth quarter in the fiscal year, we saw strong growth across our three retail focused businesses.
Our grocery and snack segment reported very strong organic net sales growth of 40.4%.
The grocery business proved to be a significant asset as consumers reengaged with convenient shelf stable products to facilitate and enhance the at home eating experience.
The refrigerated and frozen segment continued to perform very well in the quarter.
The segment reported organic net sales growth and each quarter of this fiscal year and has now had positive organic net sales growth and 11 of the last 12 fiscal quarters.
This consistency shows that our modernization efforts have been working at our sustainable.
The international segments, 19.8% organic net sales growth was due to strong growth in Canada.
And better than expected growth in the Mexican an export businesses due to the pandemic.
Foodservice reported and organic net sales decline of 31.5%, which was better than expected as many restaurants continue to serve customers consumers with curbside pickup drive through for partial capacity.
Slide 37 outlines the progress we've made on our Q4 adjusted operating margin versus the prior year.
Throughout the quarter, our gross margin expansion levers such as realized productivity pricing mix and Cogs synergies continued to be effective.
We also benefited from value driven operating leverage in the quarter approximating 100 basis points.
These tailwinds were partially offset by increased kobin related costs.
Dilution from significant foodservice operating margin declines.
And a 170 basis point headwind from inflation.
Resulting in a net gross margin improvement of approximately 110 basis points.
Given the already increased demand for food at home.
We chose to pull back a bit on a MP in the quarter.
That coupled with increased net sales drove a 100 basis point improvement to operating margin.
While adjusted SGN expense increased 5.7% in Q4 versus a year ago.
Net sales grew much faster, resulting in a 180 basis point tailwind to operating margin.
Turning to slide 38, you can see that our adjusted operating profit was 562 million in the quarter an increase of 63.5%.
Adjusted operating margin increased just below 400 basis points to 17.1%.
This chart clearly summarizes the outstanding operating margin improvement during Q4, and our domestic retail and international segments.
This was partially offset by our service segment, which has significantly lowered operating profit due to the 32% organic net sales decline.
Unfavorable fixed cost leverage on that sales decline.
Your inventory write offs and higher input costs.
Turning to slide nine we've summarized the various drivers of adjusted diluted EPS in Q4 versus a year ago. As you can see our adjusted EPS increased 39 cents in the quarter representing growth of over 100% from the same quarter last year.
While the increase in NPS is primarily driven by the increase in operating profit associated with the net sales and margin increases.
We also had higher income from ardent mills as cobot related demand was a net benefit.
We also estimate a five cents per share benefit from the 50 Threerd week.
Slide 40 summarizes the excellent progress we've made on our overall synergy capture from the acquisition of Pinnacle foods in fiscal year 19.
We realized 39 million of incremental synergies during the fourth quarter, bringing our total cumulative synergy capture since the close of the Pinnacle acquisition through the end of fiscal 20 to 184 million exceeding our fiscal 2000 goal of 180 million.
Importantly, we remain on track to deliver our total synergy target of 305 million by the end of fiscal 2002.
As a reminder, we've reinvested 20 million from our synergy realization to date into longer term business opportunities, such as product and packaging improvements and innovation related retailer investments.
As I stated on our last earnings call, we expected stronger cash flows and Q4 due to the normal seasonality of our business and the expected increase in retail demand from Coke 19.
As a result, we updated our free cash flow expectations to be north of 950 million for fiscal <unk>.
Fiscal 20 ended with the company generating approximately 1.47 billion of free cash flow, which was well above those revised expectations.
Some of this benefit was timing related.
Due to the significant increase in sales you reduced our days of inventory on hand during the quarter, which positively impacted Q4 free cash flow.
We expect to build that inventory back as we progress through fiscal 2001, which will be a headwind to free cash flow.
It is not yet clear as to the exact timing of the fiscal 21 inventory rebuild.
Another timing item in Q4 was from Freddie Federal tax payment deferrals, pushing payments from Q4 into Q1 fiscal 21.
We estimate the combined impact of these timing items on free cash flow between fiscal 20 in fiscal 21 to approximate $350 million.
Turning to slide 42 from the close of the Pinnacle acquisition in Q2 fiscal 19 through the end of the fourth quarter in fiscal 20, we've reduced net debt by nearly $2 billion.
In the fourth quarter, we reduced gross debt by 271 million and net debt by 725 million improving our leverage ratio to 4.0 times at the end of Q4 down from 4.8 times at the end of Q3.
What's not shown on the slide but it's important to note is that we improved the funded status of our pension plans during fiscal 2000 by $80 million.
With the total underfunded status declining to approximately $50 million.
For context, the pension plans underfunded status were approximately 565 million at the end of fiscal 17, a reduction of over $500 million.
This significant improvement was driven by planned pension contributions lump sum payments to participants and actual returns on plant assets exceeding expectations.
In addition to the significant progress we made towards deleveraging and fiscal 20.
We also further strengthened our liquidity position.
We obtained a 600 million three years senior unsecured term loan which remains undrawn.
This facility provides us with additional flexibility to repay debt maturity through fiscal 2001 and positions us to refinance current fiscal 21 debt maturities at attractive rates with pre payable debt.
As a reminder, we also have a $1.6 billion undrawn revolving credit facility.
Given where we finished fiscal 2000 from a net debt perspective.
And given the continued momentum we expect in Q1 as outlined in our guidance.
We are confident in our ability to achieve our targeted net debt to trailing 12 months adjusted EBITDA leverage ratio of 3.5 to 3.6 times by the end of fiscal 21.
And importantly, we continue to remain committed to a solid investment grade credit rating.
In addition, we continue to remain open to smart divestitures that can help sculpt topline performance and generate cash flow to accelerate deleveraging.
While we continue to evaluate portfolio actions, we will not pursue any divestitures that are not value, creating for the long term.
As we approach our targeted leverage ratio.
We continue to evaluate opportunities to use capital allocation to drive shareholder value.
Slide 44 outlines our guidance for the first quarter fiscal 21, and our fiscal year 22 algorithm.
We are expecting the elevated retail demand to continue into Q1, although at a lower rate than Q4.
Leading us to our Q1 organic net sales expectation of plus 10% plus 13%.
We continue to expect the favorable operating leverage from the elevated volumes in Q1 to offset the additional kobin related costs.
Therefore, we expect adjusted operating margin to be in the range of 17% to 17.5%.
These operating margin increases.
Hold with expected improvement in our below the line items lead to an expected EPS range for the first quarter fiscal 21 up 54 cents to 59 cents.
As I already mentioned, we remain confident in our ability to hit our leverage ratio target of 3.5 to 3.6 times by the end of fiscal 21.
And lastly, we are today reaffirming our fiscal year 22 algorithm.
Which is outlined on this slide and in the earnings release.
Thank you everyone that concludes my comments ill now pass it back to Sean.
Before we open up for Q and a I'd like to say a few words about diversity and inclusion at Conagra.
We are deeply saddened by the recent events, we've seen unfold across our nation. It's heartbreaking an unacceptable at racism and racial injustices continue to exist around the world.
Our goal at Conagra is to work together in a constructive manner, where everyone has a voice and has the opportunity to be hurt.
Dxi is not only part of our value system at Conagra, It's a business imperative.
We serve a wide cross section of the population and therefore, it makes clear sense our organization represents the consumers we serve.
And I has always been a focus for conagra brands.
But like many others, we can and will up our game.
We are working with an external diversity and inclusion consultancy help us identify specific opportunities that will have the most impact.
We're also hosting listening sessions with employees throughout the organization overall, we are determined to be part of the solution and we look forward to continuing to share reports of our progress along the way.
Thank you.
Now, let's open it up to Q anyway.
We will now begin the question and answer session.
To ask a question you May press Star then one touchtone phone.
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Let's try your question. Please press Star then too.
Please limit yourself to one question and one follow up.
At this time, we'll pause momentarily to assemble era.
My first question comes from Andrew.
With Barclays. Please go ahead.
Turning everybody.
Andrew Good morning.
I wanted to start off if I could with.
The company's reaffirmation of its a fiscal 2000 to target.
Typically well I understand certainly the rationale for perhaps not yet providing full fiscal year 21 guidance. The fact that you're comfortable reiterating fiscal 2002 P.S. means at least to me that there should be some good progress in 21 versus 20 to be able to achieve 22 guidance in a reason.
Double way, where I guess not all of EPS growth needs to come in 22 versus 21, if you see what I'm, saying, so any any perspective, you can add around that whether I'm thinking about that in the right way, even though I understand not providing.
Specific guidance for this fiscal year.
Yes, sure Andrew Here's how I think about this clearly.
Since nobody can accurately predict what will happen with co bid and the range of outcomes is very wide, calling 21 with any accuracy is virtually impossible.
But when you step back and you look at where we landed 20. If you look at the momentum of the business continued elevated demand the new triers very strong repeat and synergies remaining on track.
Our view is that it would be hard to argue that were not on a path.
To the 22 targets.
And the real question for US is kind of you think about our prepared remarks today on trial and repeat is whether these dynamics that we're seeing currently offer incremental long term upside beyond.
Our 22 algorithm, obviously, we're not going to comment on a longer term algorithm, but certainly these are positive markers and we have elected to invest behind.
That option for lack of a better phrase.
That's helpful and that's a good segue into them.
My follow up which is certainly appreciate all of the data and the metrics on trial household penetration repeat rates and the like and of course, none of us have a crystal ball regarding where consumption and growth rates for from any of your key categories ultimately settle out but in light I guess of the metrics you've discussed I mean would it be your expectation that for some of your key categories.
Kind of Agra should see an elevated rate of growth versus let's say pre cove. It for a more prolonged period of time.
The investments that you discussed on the call with respect to incremental capacity in such would seem to support that thought process, but but again wanted to hear from you and get some clarity.
I think that phrase I used earlier was we see this as a unique window something is happening that is above and beyond what our normal marketing programs would do.
Co bid has introduced this dynamic where as you saw the slides earlier consumers are legitimately rediscovering certain things in their house.
Whether it's their kitchens their freezers being together and they like it.
There are also discovering that some of the things that they bought.
Existed actually have changed quite a bit. So for example, the quality of frozen food and as you know we've spent the last five years dramatically transforming our product. So you put both of those things together and there is clearly an element of pleasant surprise the consumers have when it comes to cooking at home and given.
This value proposition of cooking at home and that we are in a recessionary environment.
It's entirely plausible that these dynamics persist for some time, especially with the news changing hourly on cobot in what's happening with positive cases.
And we believe that once people try our products. The data supports that we stand a very good chance they'll come back again, and again and again. So we are investing today in order to maximize long term value creation potential lose portfolio and really sees any option that there is further upside beyond our current out.
Rhythm.
Thanks, so much.
Our next question comes from Ken Goldman with JP Morgan. Please go ahead.
Hi, good morning.
Good morning.
I think any to check what was in my smoothly. This morning, because I'm on slide 31, I thought I saw a unicorn Lama learning sunglasses, and a boxes back to that I must be hallucinating.
You did not lamas or hot.
I didn't know that I knew you guys as is that two can you probably may not announce that either act two is on fire.
I Didnt know that until I saw your slides so I appreciate that.
[music].
Couple of questions from me, if I can and Dave you may have answered. This when you talked about not being clear on the timing of the inventory rebuild.
But in your first quarter organic sales guidance I was there any benefit baked in there from an inventory load by retailers or is that sort of what you expect consumption to be as well roughly.
Yes so.
Can you saw in Q4, we shifted consumption everywhere, except refrigerated and frozen that was really driven by Bert side in this environment. It is difficult to predict exactly when retailers are going to build inventories and so.
As we put our Q1 guidance together clearly it started with them and.
We tried to make some assumptions on will there be additional shipments to build inventory, particularly in frozen, but again, it's in this environment, it's difficult to predict just given the significant demand thats still there.
Just a comment I'll try to Ken just more broadly retailers are at some point going to rebuild inventories I would imagine and all their categories and if you think of in the last several years.
The focus on on time and full of the focus we've talked about recently with retailers, putting more facings against high velocity is retailers eight out of stocks. So that is not going to change and at some point I would imagine that than inventory levels.
Would revert to kind of historical norms of the question of course is when will that happen because the way that happens is one of two things are both after happened either demand has to slow or capacity has increase we've seen demand slow recently, but it's still at very very high levels. You also heard me talk about how we're making investments increase.
Capacities, but there is an upper control limit to how we can do that so for the foreseeable future.
In the near term, where we are running flat out and much of what we make in leaves our plants is going straight through to the consumer when that slows down and the inventory levels Bill back is one of the wild cards that virtually impossible.
To predict.
Well I've got you.
Since you raised act two I want to link your question on act to back to Andrew's question, which is.
I will any of what we're seeing now persist well interestingly one of the things that you're seeing now and you are reading about now is movie studios are going to direct release.
At home on demand and there's there's some questions around what's going to Abbott with movie theaters going forward as that happens.
People will be watching movies as a group at home at a level, we probably have not seen before we're already experiencing Ms and the shift in our microwavable popcorn business has been dramatic reflecting that new behavior that could very well be a persistent thing.
But it may depend in part on what the movie studios ultimately choose to do but those are the kinds of things that seemed to be logically tracking in our favor, but we need to see how how long may persist.
Okay. That's helpful.
Thank you for that and then for my follow up quickly.
We are hearing some rumblings in the trade that may be retailers are considering getting a little more aggressive on pricing in the back half of calendar 20.
Just because of the obviously the economic environment, and maybe they'll ask some vendors to help out with that but we're not seeing any hard evidence of this yet I just wanted to know from your perspective are you hearing about any incremental and I could say incremental pressure from or can the from your customers in that pricing front.
Okay.
Not really can at this point and I I would say, it's probably a function two things number one.
Our portfolio as you know has a very strong value segment to it.
Brands like banquet and now they're already offer extremely favorable value that is and historically have proven very resilient in a recessionary and buyer.
The other piece of it too is that in many of the categories. You can see you continue to see out of stocks because.
The the throughput is flat out in demand still exceeds that that product production.
Availability and therefore, you only exacerbate that problem when you price promote in that type of the category. So I think it it will be category specific I will point out so that in our Q4, we did honor most of our promotional commitments and.
That's because those were long standing commitments, we have a principle of not kind of backing out, but but going forward I would expect.
Our average scan prices may move north a little bit near term because we are likely to see.
Less discounting price promotion activity. However, I wouldn't want you to take that as less retailer investment because it's more likely to be a shift in retailer in vestments.
Really the profile of the retailer spend than the absolute level, so less discounting more brand building more new habit creation.
To give you specific example, good example would be creating loyalty on our frozen brands with millennials by making click and collect behaviors habitual by increasing our E com spend with retailers. That's a positive constructive alternative in a supply constrained environment to to more of a price per.
Most can approach.
Very clear thank you.
Our next question comes from David Palmer with Evercore. Please go ahead.
Thanks, Good morning.
Good morning to.
That fiscal 2002 guidance, it's obviously a closer than it's been before and its and its also above consensus and it might be hopefully the first full year without this covert issue.
So related to that what are what are the key one or two variables that you'll be watching and thinking about that would make that mid to high end of that guidance possible and I have a follow up.
Well I think you know.
The way I.
Framed it up earlier is we have momentum on the business and we are investing to maintain that momentum and as we maintain that momentum.
We have a very good chance of continuing to bring more households into our portfolio and then converting them to.
Multiple time repeat purchasers, that's really the the logic flow as to as to how you get.
Right right in the heart of that that long term topline profile.
I would just add to that just obviously the synergy number that we have making sure that that stays on track we feel good about it we're on track.
We affirmed at again, but making sure we deliver that managing all our other core productivity.
Programs to be able to offset inflation that recall with us got us a long way there on the bottom line side of the long term algorithm that alongside the additional volume and any operating leverage associated with it.
It's obviously.
Good thing for our portfolio.
And then just a follow up the free cash flow conversion of earnings obviously that relationship of Capex to DNA, but.
How much how do you see that in 22 free cash flow versus that earnings target. Thanks.
Yeah, I mean, we had guided to greater than 95% I think was our guidance than that.
That again shouldn't change that I did comment that as it relates to fiscal 2001, because we finished fiscal 20, but with very strong free cash flow in some of that was timing right. So was about $350 million of benefit that we received in Q4.
Due to basically inventory working capital benefits and some timing on tax payments, that's going to flip into fiscal 21. So when you look at 20 versus 21, you're going to see a super high conversion in 20, that's going to come out and 21 for the 350.
But 22, we should be back in balance.
Great. Thank you.
Yes.
Our next question comes from Nik Modi.
RBC. Please go ahead.
Thanks, Good morning, everyone.
Overall, just two quick questions to me when you think about guidance equal volume for the upcoming quarter I'm. Just curious if you could welcome perspective on how you're thinking about demand and I ask that only because you know obviously in recent weeks as recent data the K surge as world Mountain very popular eight which I will.
Second would probably accelerate from the at home food consumption and the reopening slow.
Just wanted to get perspective on that and then.
So maybe you could just provide some kind of off respectively on innovation timing and how things are shaping up with retail trends on the next we fast and just kind of how you're thinking about your innovation for the next six months or so thanks.
Sure on the first piece.
If you go back to the beginning of this thing Nick what happened was we had this massive initial surge rate with pantry stocking and alike and.
That went a long way toward kind of depleting, our inventories and and really starting to deplete customer inventories. Since then while we havent been at the level that initial surge demand has been extremely high. So we've we've got categories, where we've hit the ceiling, where we're just flat out we've got categories, where we've made some.
Early progress in starting to kind of catch up Bob but.
With another surge that's just going to put more strain on it. So we are focused it's interesting that we are typically focused on optimizing demand and now we're in this environment, where we are really heavily focused on optimizing supply because we're we're really up up against it and that.
Has been the case in the early days of our Q1.
And you look at the scanner data has been been pretty strong and that's all previous news of these these upticks. So we've got to monitor it we're doing everything in our power to add additional capacity so that weekend.
Protect the upside to to the best of our ability, but it is going to be it's going to be strained near term and we are investing to make sure that that that happens did you have anything else that on that point, David just briefly for organic net sales, we do expect strong growth from the domestic retail businesses so as Sean.
On said and you see in consumption just to get a little color on the other segments international is going to be relatively flat. We had a really strong Q4, we don't expect to see the important organic net sales growth in Q1 to that level and then continued declines in foodservice like we saw in Q4.
Now with respect to innovation, let me for I'd comment on forward looking Univision Contributable perspective on Q4, because recall at Cagney, we had talked about how some of our customer base had moved up their shelf resets in frozen and I'm sure. Many of you are curious what happened with that with respect to come.
David hitting well you may be surprised to learn the vast majority of our customers proceeded as planned in Q4 with their earlier frozen resets and that's good news, we see our exciting fiscal 21 innovations on the shelf and they look great and we are hustling to try to keep them in stock because theyre, they're obviously getting good trial.
And also with respect to Q4 innovation in total which includes the innovations we launched earlier in the year odd Q4 innovation was up over 25%.
Versus the prior Q4 and definitely had some benefit versus the prior Q4 of shipments following years innovation coming a little bit earlier, and that's because of those frozen.
Shelf resets that we talked about but the reality is despite what you've heard about SKU reduction to maximize throughput and things like that we have.
Continue to have strong favorable reaction from our retailers on our new innovation and we continue to feel super strong about the slate, we've got out there and expected to perform well this year as you've seen in the last few years every years innovation has outperformed the prior years for the last several years and there's no reason.
To expect this year wouldn't continue, albeit we have a few more wild cards that we are dealing with than than in previous years.
Very helpful. Thank you.
Our next question comes from David Driscoll, leading research. Please go ahead.
Great. Thank you good morning.
Morning.
I wanted to start off with the grocery and snacks in the frozen and refrigerated slide nine shine you've got to get nice metrics here, but what I want to get your impression of is the you've made a comment repeatedly for years to your expectation is that frozen is going to be just a critical area of growth in the grocery store.
Well, we just look at these fourq results, obviously heavily affected by coded right. The staples pieces growing much much faster than frozen theres that initial stock up that's going on in there. What I was hoping you could do is just explain how you thought frozen would grow relative to that of staples on on a go forward base.
Basis should frozen lead half as much as staples as we see almost in this graph or should froze in on a relative basis beginning to be much stronger. After we've kind of cleared through that first stock up that occurred in March April.
Well well.
Slide nine that you referred to is actually pretty consistent with what I would expect having been in and around staples products for a lot of my career whenever you see any kind of crisis hit.
People will load their dry goods, pantry, which has a tremendous amount of holding power.
And and actually you tend to see more of a pantry load dynamic there because of the holding power pantry relative to the holding power of freezer. Most freezers are actually incredibly limited in space and Thats one of the governors that you see on frozen interestingly one of the things we didn't put in the deck is the sales rate of stay.
Standalone frozen freezers, if you had gone to a home depot or a best buy in the last few months in search of freezer, you would not have been able to find one.
So clearly consumers are recognizing there's a limit to what they can fit in there freezer I know in my household.
We were frustrated because we get to that you'd go to the store on a day at shipments came you want to buy stuff, we had nowhere to put it because your freezer was full so that's a governor you have there versus.
This is staples that said, while I might expect the two to converge more going forward.
Staples, what you see in the staple space is a super value proposition. So chef boyardee and this may be more of a function of what is the consumers household balance sheet look like going forward, how long does a recessionary environment persist items like chef are a tremendous value proposition and that kind of environment should continue to perform well. Furthermore, if people are.
Learning to Cook again, and cooking from scratch a lot of the staples products, we have like Pam cooking spray or our beans business or our tomato business ought to remain elevated and these are the kinds of things you can use in multiple recipes throughout the week that are different recipes as opposed eating the same thing again and again, so yeah, I I'm not going to.
God try to forecast how these will perform relative to one another the key point, we wanted to make today is that all three of our consumer dip domains have been elevated and are enjoying this this notion of rediscovery in discovery that I talked about.
That's helpful.
Dave I just wanted to follow up on M&A in the fourth quarter as a percent of sales if the SNA was down significantly versus kind of what the trend rate that we had seen in the prior few quarters.
Do you expect on on a go forward basis can you get that SGN as a percent of sales to continue to be reduced.
For the next bunch of quarters or any color. There I mean, I know, you're not giving explicit guidance, but just any color on how you're thinking about as genie as percent of sales very helpful.
Or Dave so at a high level, obviously, a lot of the synergy that we're getting from pinnacle is SDMA in fact more than half of the synergy to date has been from SGN AG more will come in cost of goods sold moving forward. So.
So that is starting to work its way in quarter by quarter into our actual results. So as I looked at Q1, because we gave specific margin guidance in Q1.
A big part of the operating margin improvement versus the prior year is actually because of the bridge on SGN today.
So the 17% to 17.5% a good amount of that improvement as the SGN a leverage gross margin theres a lot of puts and takes with all the different costs. So there'd be more moderate improvement there, but it's mostly yesterday. So we start seeing that leverage in a bigger way starting in Q1, and you will continue to see leverage going forward I'm not going to give you specific.
Numbers, but that's that's the color for Q1 press Gena.
But the leverage does continue even if you don't give exact numbers you're confident that the leverage continues in the in the following quarters.
Yeah, obviously it depends on sales right, but yeah, we took the SDMA cost out and we're going to continue to see that benefit.
Thank you.
Yes.
My next question comes from Robert Moskow with Credit Suisse. Please go ahead.
Hi, Thanks for the question actually a couple.
I think talking to investors a lot of controversy around Conagra does still revolve around this long term ats range because it is so much higher than where we are fiscal 20 results.
Wondering in August when your proxy gets published do you get a peak at the three year cycle for fiscal 2000 to fiscal 22, and the EPS target Thats in there for our executive compensation.
Because I think that would give people a better.
Sense.
How management's being incentivized.
Relation to target that you've given us I think belvita per cycle that we'll get to see.
How executive comp is related to that at range is that fair assessment.
Yeah, Rob the way I'd respond to that is big picture. Our board has a very strong pay for performance philosophy as such the targets in our incentive programs are anchored in our annual and long term financial.
And consistent with the guidance that we provide to investors. So with respect to the 2020 proxy we expect our disclosure to mirror that of past years, we will provide details on the physical 20 to 22 program overall, including the growth CAGR is that are in the program and you'll see that management and shareholder.
Our interests are aligned with respect to the 22 numbers.
Great, Okay, and a quick follow up.
I remember last year, there was a lot of inventory de loading in the frozen section related to the.
The shelf resets.
Given what you've set now about the reset seeing Doug.
Are there they're going to be any kind of inventory reload in first quarter and is that part of your guidance for is your guidance related to consumption and consumption will reflect.
I think near term Rob.
Here, we are playing catch up.
We're trying to keep up with demand orders.
Have continued to come in and and inventories have been depleted.
And it varies obviously by category. So as you know as long as demand remains elevated it's more of a flow through to consumption and pantries I think than a a rebuilding and inventory now that is going to bury by category. Because you don't see the same level of pole category by category. So you can almost.
Model out categories with kind of more muted pull are probably rebuilding inventories categories were pull remains extremely strong, we're probably continuing to run flat out and scanning.
A lot of what we're producing.
Got it great. Thank you.
Our next question comes from Bryan Spillane with Bank of America. Please go ahead.
Hi, good morning, everyone.
Good morning, Brent just two quick ones.
I might've missed it but Dave capital spending for fiscal 21, given I guess, what some of the commentary that's been made about investment.
Even if we can't give a pinpoint number directionally would it be close to what it's been historically or is it going to be higher than normal this year.
No Brian I did not mention it specifically, but as we look to fiscal 21 based on the investments that Sean to outline, particularly.
Investments to shore up capacity and supply we will be increasing our capex right now our estimate is that we'd be about a $100 million above where we landed fiscal 20 in terms of capex. Okay. Great. Thanks, and then maybe Sean as a follow up Rob Moskow question about the incentive comp.
Have you made any adjustment.
In Q2, with maybe with frontline employees or just organizationally to focus more on being in stock and keeping up with demand I think you fracing before versus having to.
Previously really trying to stimulate demand. So I'm just trying to understand if you had to kind of change the incentive mix a little bit to ensure that youre going to be get the capex projects go.
Happening on time and and really.
Proving service levels.
Well, our our short term for our salaried employees. Our short term incentives is really a function of of sales of profit and cash flow and plays are incentivized very clearly to maximize those.
At the in the last quarter the real.
Focus area for us has been in our facilities. It side, it's been in ensuring the health and safety of our employees.
Because we've got to keep our plants running and then also honoring those employees for being such heroes.
During this intense cobot period on the front lines and we have made investments behind our front line employees to honor them. Accordingly eyes. So that's really what's been in place and as I mentioned earlier I couldn't be more pleased with.
Just this incredible refused to lose attitude that we've seen especially on the frontline.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Brian Corny for any closing remarks.
Great. Thank you. So as a reminder, this call is being recorded and will be archived on the web as detailed in our press release.
Our team is available for any follow discussions anyone may want so thank you for your interest in Conagra brands.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.